'Bad News is Good News!' An Empirical Study of the U.S. Credit Rating Changes

This paper examines the price effects following credit rating revisions. We find a new return series after the announcement of credit downgrades. Contrary to the most recent US studies by Griffin and Sanvicente (1982), Holthausen and Leftwich (1986), Hand et al. (1992), and Dichev and Piotroski (2001), there is an evidence of negative excess returns for the next few days but positive and statistically significant BHARs after the credit downgrades. We observe an improving financial positions and operating performance of the downgraded firms in the post-announcement periods. Consistent with the findings in Gompers et al. (2003), Brown and Caylor (2004), and Bebchuk et al. (2005), firms with weaker corporate governance structure will be underperformed in the long-run. Additionally, investors are willing to pay a higher (price) premium for the better-governed firms, even though these firms have been received credit downgrades one year ago